Testimony before a legislative committee in Pierre on Tuesday made clear that there is a growing gap between property tax payments by private and agricultural property owners.

State legislators Study committee on the methodology of property tax assessment heard from district directors of compensation and lobby groups.

People who own the home they live in are known as the “owner-occupied” class of property taxpayers. Matt Krogman, lobbyist for the South Dakota Association of Realtors, said these homeowners would bear the brunt of the tax increases.

“We believe we are in the midst of a change, and this change is at the expense of homeowners,” Krogman said, “And we believe that if nothing is done to make a change, it will only get worse.”

He cited data from the State Tax Office showing that the share of nationwide property taxes paid by agricultural landowners fell from 28% to 22% between 2017 and 2023, while the share of agricultural landowners rose from 38% to 43%.

One factor in the disparity was the COVID-19 pandemic. South Dakota saw an influx of telecommuters and other homebuyers fleeing pandemic restrictions in other states. According to Research from the Dakota InstituteHigh demand for homes helped the state’s average list price rise 36% from 2020 to 2023, even after accounting for inflation.

Because the tax assessment of homes is tied to market value, some South Dakota homeowners have seen double-digit increases in value for several years. And those steep increases have driven up their property taxes.

Another factor, says Krogman, is that farms benefit from a productivity-based tax system. adopted in 2009 and fully implemented by 2019. He said the tax relief for agriculture had become a tax burden on homeowners.

Scott VanderWal, president of the South Dakota Farm Bureau Federation, defended the productivity-based rating system for agricultural land.

“It’s not perfect, but it’s worked pretty well for the last 14 years,” VanderWal said.

He said some of the reasons for rising home taxes and relatively unchanged farm taxes are the ongoing conversion of agricultural land to housing and urban sprawl.

Before the change to productivity-based land tax, agricultural land was taxed based on its selling price. This led to internal inequalities in agricultural land where land near urban areas had a higher market value than rural land despite similar productivity. Therefore, the state moved to productivity-based assessment, focusing on the agricultural production of the land rather than its selling price.

Some States use a similar model to protect the agricultural economy and prevent excessive tax increases by putting pressure on non-agricultural markets.

Options for action for the legislator

In South Dakota, property taxes are the primary source of revenue for local governments, including schools, counties, and municipalities. Cities receive both property taxes and sales taxes, and the state receives sales taxes.

In 2023, more than $1.6 billion in property taxes were collected to support local governments: 56% went to schools, 27% to counties, 13% to cities and towns, and special levies received 2% each.

According to Sanderson, property taxes depend on two variables: the locally determined need to fund schools, cities, counties and other local governments, and the locally assessed value of owner-occupied commercial and agricultural properties.

In order to meet the needs of local units, a locally determined rate, known as a levy, is then levied on the property value, which is calculated by dividing the local needs by the estimated value.

“That’s it. That’s a levy,” Sanderson said. “It’s literally the last step in the process. It’s the logical, mathematical result.”

For example, if the local need is $1 million and the assessed value is $500 million, the levy is 0.2%, or $2 per $1,000 of the assessed value.

According to Sanderson, financial needs are determined by local government bodies such as school boards, county commissions, city councils and town councils, not the state. In addition, properties are valued by local authorities, not the state.

Therefore, Sanderson told South Dakota Searchlight that the options for government intervention are largely limited to shifting the tax burden to another asset class or finding alternative sources of financing.

However, the state has several roles in property taxes. Legislatures write the laws that govern the property tax system; they set the amount of state grants that go to schools each year to ease the burden on property taxpayers; and state law limits the annual increase in property tax revenue to an inflation-related surcharge of up to 3% plus the value of new construction, unless a local taxing authority decides to deviate from that limit.